Investors looking to live off of the dividends their portfolios generate can make life easier by adding some monthly-pay stocks to their portfolios. It's almost like collecting a regular paycheck. The real estate investment trust (REIT) sector is where you'll find a lot of options, with two particularly attractive choices in Realty Income (O 0.46%) and Agree Realty (ADC 1.49%). The pair has many similarities and a couple of key differences.
Aligned in a good way
Both Realty Income and Agree make use of the net-lease approach. This basically means they own single-tenant properties, and their tenants are responsible for most asset-level operating costs (like maintenance). Across a large enough portfolio this is a fairly low-risk investment approach, even though any single property carries material tenant risk. Both Realty Income and Agree are sizable REITs (more on this below).
In addition to this, both are heavily focused on retail assets. For Agree, retail is the sole asset class, while Realty Income generates about 75% of rents from retail and mixes in industrial assets and some unique one-off properties (vineyards and a casino) to round things out. The benefit of retail properties is that they tend to be smaller and roughly similar to each other. That means that they can be bought and sold fairly easily, and finding a new tenant for a well-located asset isn't all that hard.
Meanwhile, Realty Income and Agree both have rock-solid balance sheets. Realty Income is rated A- by S&P, with Agree at BBB. Although Realty Income carries a slightly better credit rating, both are financially strong and should have ample access to the bond market at attractive rates. This is good, because debt is an important funding source when buying new properties.
Some notable differences
So far, picking Realty Income or Agree would seem like something of a toss up, with the only major difference being the greater diversification afforded by Realty Income (for the record, the REIT also generates around 12% of rents from Europe). However, there are some very important distinctions that will likely have a more important impact on your investment decision.
ADC Dividend Per Share (Annual) data by YCharts
For example, Realty Income has increased its monthly pay dividend annually for 29 consecutive years. That's an incredible streak. Agree's streak is less impressive at just 10 years. It cut the dividend in 2011 because it was, at the time, fairly small (less than 100 properties) and a large tenant declared bankruptcy. The dividend didn't start growing again until 2013. Although Agree is a much different company today, Realty Income's dividend record is without question stronger.
That said, Realty Income's portfolio of more than 12,400 properties is gigantic. Agree's portfolio is "just" 1,900 properties. So while Agree is much bigger than it was, it is still a tiny player relative to Realty Income. There's good and bad here. Most notably, Realty Income, with a $42 billion market cap, needs to invest a huge sum of money to grow, meaning that it is easier for $6 billion market cap Agree to grow its portfolio. And Agree has ramped up its growth over the last few years.
ADC Dividend Per Share (Annual) data by YCharts
Portfolio growth is what supports dividend growth for a REIT. Realty Income's dividend has grown at a compound annual rate of around 4.4% versus Agree's 6% over the past decade. Given the smaller size of Agree, it is likely that it can continue to grow its dividend more quickly. Small differences add up over long periods of time, suggesting that Agree would be a better option for dividend growth investors.
That brings the story to the dividend yield. Realty Income's yield is roughly 4.9% today. Agree's yield is 4.3%, as investors have been willing to pay a premium for the higher growth rate. Although the absolute difference here isn't huge, Realty Income's yield is nearly 15% higher, which suggests it would be a better fit for investors focused on maximizing income.
Neither is a bad choice
At the end of the day, both of these monthly-pay dividend stocks look like strong options. The differences between them are nuanced, with Agree slightly more appropriate for dividend growth investors and Realty Income for those seeking out a higher-yielding investment. If you have the capital, the best option might actually be to consider adding both Realty Income and Agree to your portfolio.
